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Tuesday, April 28, 2015

Can India leapfrog into decentralised energy?

India woke up to telecommunications through the reforms of the late 1990s: the power of DOT was curtailed, VSNL was privatised, private and foreign companies were permitted, new methods of working were permitted. At the time, wired lines were mainstream and wireless communications was novel. However, setting up wire lines in India is very hard. India leapfrogged, and jumped into the mobile revolution for both voice and data. The concept of not having a land line at home was exotic in the US when it was normal in India. In similar fashion, India was an early adopter of electronic order matching for financial trading, and of second generation pension reforms: these things became mainstream in the world after they were done in India.

Could similar leapfrogging take place in the field of electricity? An important milestone in this story will come about with the announcement by Tesla Motors on Thursday the 30th of April, 2015.

The problem of electricity, worldwide

Electricity consumption fluctuates quite a bit within the day. More electricity is purchased when establishments are open (i.e. daytime), when it's too hot or too cold, and when humans are awake in the dark. The electricity system has to adjust its production to ensure that instantaneous consumption equals instantaneous generation.

If producers are inflexible and consumers are inflexible then generation will not equal consumption. The puzzle lies in creating mechanisms through which both sides adjust to the problems of the other in a way that minimises costs at a system level.

For producers, it is not easy to continually modify production to cater to changing demand. The two most important technologies -- coal and nuclear -- are most efficient in large scale plants which run round the clock. It may take as much as a day to switch off, or switch on, a plant. These plants are used to produce the `base load': the amount of electricity that is required in the deep of the night. Other technologies and modified plant designs are required to achieve flexibility of production within the day. This flexibility comes at a cost. Suppose the lowest demand of the day is $L$ and the highest is $H$. For the electricity system as a whole, a given level of average production is costlier when $H/L$ is higher. The cheapest electricity system is one where $H/L=1$; this runs base load all the time.

Matters have been made more complicated by renewables. Solar energy is only available when it's light, while peak demand of the day is generally in the late evening. Electricity generation from windmills is variable. Further, the planning and despatch management of the grid is made complicated when there is small scale production taking place at thousands of locations, as opposed to the few big generation plants of the old days.

There are thus a large number of decisions: how to produce, how much to produce and when, how much to consume and when. Economic efficiency is achieved by putting a market in between buyers and sellers, where the price of spot electricity continuously fluctuates. The electricity industry, organised around this price, becomes a self-organising system where a large number of players make uncoordinated decisions about how much and when to consume, how to produce, and how much and when to produce. The price in this market is the summary statistic of `the problem of electricity, worldwide' as articulated above. Here's an example (source) of the key patterns, from PJM Interconnect, the biggest power market of the world:

Figure 1: Demand and price of electricity at the PJM Interconnection

The orange line shows consumption. This was lowest on Saturday night at around 70 GW. It peaked in the evening of Thursday at around 160 GW. This was $H/L> 2$! This gave huge fluctuations in the price, which is the blue line in the graph above. Base load production has no flexibility and was probably configured at 70 GW. When demand was 70 GW, the price was near zero, given the inelasticity of base load production. The price went all the way up to 450 \$/MWh at the Thursday peak.

From the viewpoint of both consumers and producers, these massive price fluctuations beg the question: How can we do things differently in order to fare better? The question for consumers is: How can purchase of electricity from the grid be moved from peak time to off-peak time? The question for producers is: How can more production be achieved at peak time?

Unique features in India

All this is true of electricity worldwide. Turning to India, there are two key differences.

The first issue is that ubiquitous and reliable electricity from the grid has not been achieved. The mains power supply in India is unreliable. The euphemism `intermittent supply' is used in describing the electricity supplied by the grid in India. Households and firms are incurring significant expenses in dealing with intermittent supply (example). Intermittent power imposes costs including batteries, inverters, down time, burned out equipment, diesel generators, diesel, etc. Diesel generation seems to come at a cost of \$0.45/kWh. When power can be purchased from the grid, it isn't cheap, as a few buyers are cross-subsidising many others.

In large parts of India, the grid has just not been built out. There are numerous places where it would be very costly to scale out the conventional grid. There are places in India where calculations show that a large diesel generator in a village has strengths over the centralised system. There are small towns in Uttar Pradesh where private persons have illegally installed large generators and are selling electricity through the (non-functioning) grid, in connivance with the local utility staff.

Global discussions of energy systems talk about base load and peak load. In India, the existing generation capacity is not adequate even at base load! The apparent $H/L$ in the data is wrong; demand at the peak is much greater than $H$ -- we just get power cuts. Every little addition to capacity helps. There has been a large scale policy failure on the main energy system. Perhaps more decentralised solutions can help solve problems by being more immune to the mistakes of policy makers.

The second interesting difference is high insolation with high predictability of sunlight.

Compare the insolation in Europe:

Figure 2: Insolation in Europe

against that in India:

Figure 3: Insolation in India

(source for these maps). Note that the deep blue for the European map is 800 kWh/m$^2$ while for the Indian map, the same deep blue is 1250 kWh/m$^2$. Arunachal Pradesh and Sikkim get more sunlight than Scotland.

Innovations in renewables

Substantial technological progress is taking place in wind and in solar photovoltaics (SPV).

Wind energy is enjoying incremental gains through maturation of engineering, and also the gains from real time reconfiguration of systems using cheap CPUs and statistical analysis of historical data from sensors.

The price of crystalline silicon PV cells has dropped from \$77/watt in 1977 to \$0.77/watt in 2013: this is a decline at 13% per year, or a halving each 5 years, for 36 years. This is giving a huge surge in installed capacity (albeit a highly subsidised surge in most places).

For decades, renewables have been a part of science fiction. Now, for the first time, massive scale renewable generation has started happening. The present pace of installation is, indeed, the child of subsidy programs, but the calculations now yield reasonable values even without subsidies. If and when the world gets going with some kind of carbon taxation, that will generate a new government-induced push in favour of renewables, which could replace the existing subsidies in terms of reshaping incentives.

Innovations in storage

Electricity generation using renewables is variable (wind) or peaks at the wrong times (solar). In addition, wind and solar production is naturally distributed; it is not amenable to a single 100 acre facility that makes 2000 MW. These problems hamper the use of renewables in the traditional centralised grid architecture. These problems would be solved if only we could have distributed storage.

What would a world with low cost storage look like? Imagine a group of houses who put PV on their roofs and run one or two small windmills. Imagine that these sources feed a local storage system. The renewable generation would take place all through the day. When electricity prices on the grid are at their intra-day peak, electricity would be drawn from the storage system.

For the centralised system, the cost of delivering electricity at a certain $(x,y,t)$ can be quite high: perhaps households at certain $(x,y,t)$ can sell electricity back to the grid.

This is the best of all worlds for everyone. The grid would get a reduced $H/L$ ratio and would be able to do what the grid does best -- highly efficient large-scale base load technologies. The grid would be able to deliver electricity to remote customers at lower cost. Consumers would be better off, as payments for expensive peak load electricity would be reduced.

This scenario requires low cost storage. For many years, we were stuck on the problem of storage. In recent years, important breakthroughs have come in scaling up lithium-ion batteries, which were traditionally very expensive and only used in portable electronics. Lithium Ion batteries have 2.3 times the storage per unit volume, and 3.1 times the storage per unit mass, when compared with the lead acid batteries being used with inverters in India today.

Tesla Motors is an American car company. They have established a very large scale contract with Panasonic to buy Lithium Ion batteries. Nobody quite knows, but their internal cost for Lithium Ion batteries is estimated to be between \$200/kWh and \$400/kWh. On Thursday (30 April 2015), they are likely to announce a 10 kWh battery for use in homes. It's cost is likely to between \$2000 and \$4000 for the battery part, yielding a somewhat higher price as there will also be a non-battery part. (It is not yet certain that the part they announce will be 10 kWh. There are many stories which suggest this will cost \$13,000, which are likely to be wrong).

A 10 kWh battery can run for 10 hours at a load of 1000 Watts. Note that Tesla is only pushing innovations in manufacturing; they are not improving battery technology. Many others are on the chase for better battery technology.

Stupendous progress has happened with batteries in the last 20 years. Only two years ago, this price/performance was quite out of reach. It is a whole new game, to get a Lithium-Ion battery at between \$200 to \$400 per kWh. Suddenly, all sorts of design possibilities open up. Further, this is only the beginning.

Experts in this field in the US believe that when Lithium Ion batteries are below \$150/kWh, they will be fully ready for applications in the electricity industry in the US. These experts believe this number will be reached in 5 to 10 years.

The rise of storage links up to the rise of electric cars in two ways. First, electric cars are driving up demand for lithium-ion batteries and giving economies of scale in that industry. Second, a home which has an electric car has that battery! The present technology in electric cars -- Tesla's Model S -- has a 85 kWh battery, which is good capacity when compared with the requirements of a home.

Renewables have generated excitement among science geeks for a long time, but have disappointed in terms of their real world impact. Scientific progress in renewables, and in batteries, are coming together to the point of real world impact.

Storage is one method for coping with the intermittent generation from renewables. The other method is to make demand more flexible. As an example, a smart water heater or a smart air conditioner could do more when electricity is cheap, and vice versa. This would make consumption more price elastic.

Leapfrogging in India?

The Indian environment with expensive and intermittent electricity from the grid is an ideal environment for renewables + batteries.

Distributed generation and distributed storage are seen as ambitious cutting edge technology in (say) Germany. Perhaps the natural use case for this is in India. In Germany, the grid works -- there is no problem with achieving high availability. In Germany, there isn't that much sun. In India, every customer of electricity suffers increased costs in getting up to high availability, and there is plentiful sunlight.

A weird thing that we do in India is to charge high prices for the biggest customers of electricity. For these customers, roof-top PV systems are already cheaper. Problems in the fuel supply have given a steep rise in base load prices, and have pushed the shift to renewables.

In the US, the cost of power varies between 7 and 20 cents/kWh. In this environment, grid parity requires that Lithium Ion batteries achieve \$150/kWh. In India, the break even point is much higher. The announcement on Thursday may yield a price that is viable for many applications in India.

At a campus scale in India, a small electricity system could be constructed with the following elements:

The roofs are covered with PV.

There are a few windmills. Large-scale adoption would require windmill designs which cater to aesthetic sense and not just technical efficiency.

It would make sense to add one diesel generator into the mix, with the advantage that it would run at top efficiency as it would only be used to feed the battery. (This is similar to the efficiencies of running the engine in a hybrid car).

The campus would buy electricity from the grid when it's available and when it's cheap, and use this to charge the battery.

Electricity from the grid, the renewables and the disel generator would feed the battery.

All consumption would happen from the battery. Users inside the campus would experience 100% uptime.

Electric cars and motorcycles could augment the battery capacity at the campus scale.

Cheap CPUs would give the intelligence required to seamlessly orchestrate this system, in real time, all the time.

As an example, the picture below is a pretty windmill, 3m diameter and 5m high, which has a nameplate rating of 6500 watts. The output would vary with the wind, but under normal circumstances in India, we might get average production of 1500 watts from this.

Figure 4: A windmill with aesthetic qualities

Sprinkling a few of these devices on a campus would be quite elegant. Here is another example, a device that is 1.5m wide, and costs 4000 Euro or Rs.260,000.

A large number of installations of this nature would change the elasticity of demand for electricity. When there is peaking load, and the price of electricity is high, these installations would switch to using their batteries. This would reduce the $H/L$ ratio and thus bring down the capital cost of the centralised electricity system.

A related development is taking place with rural mobile towers in India. These must grapple with the problem of intermittent electricity, and are starting to do distributed electricity generation for surrounding households. They are also pushing into new storage technologies.

Scenario 1: Hunky dory

Scenario 1 is where all this happens. For this, five things have to happen:

Higher oil prices, ideally a carbon tax worldwide.

In industrial countries: continued government support for R&D and adoption of renewables and electric cars.

Continued worldwide scientific progress with batteries.

Sustained low interest rates, globally, for a long time.

Electricity policy in India which gives time-of-day pricing all the way to each household, and sets up an API through which a CPU at the household can query the price. Ideally, a mechanism for distributed producers to sell back to the grid at a cost which reflects the cost faced by the grid in delivering electricity at that location.

If these five things happen, then we're pretty much on our way to a new world of distributed generation and distributed storage, in India and in the world outside.

One interesting consequence of this scenario would be a sustained decline in crude oil prices. This would finally yield the outcome envisaged by Sheik Zaki Yamani who said in 1973: The stone age did not end because the world ran out of stones.

Scenario 2: This shapes up as a mainstream technology for difficult areas only

In an alternative scenario, these five things do not quite work out okay, and distributed generation + distributed storage do not shape up as the mainstream technology for every day use in the first world. However, this could still be compatible with the possibility that these are good technologies for a place like India where grid supply is untrusted and there is plenty of sunlight.

An Indian public policy perspective

The malleability of a late starter. In the US, where the grid is well established, these new developments threaten the business model of the existing electricity industry where vast investments are already in place [example]. In India, high availability grid power has not yet come about; the grid is far from meeting the requirements of the people. Hence, there is greater malleability and an opportunity to change course, in a direction that favours decentralisation and reduced carbon.

Allocative decisions for the capital that goes into distributed energy. On the scale of the country, capital would shift from centralised production of electricity to distributed production + distributed storage. In the Indian public policy environment, it's always better to have self-interested households and firms making distributed choices about capital expenditures, rather than capital being placed in the hands of regulated firms.

Industrial policy is not required. This article is not a call for industrial policy. We don't need to launch subsidy programs, or force car manufacturers to switch to electric, or force mobile phone towers to switch to renewables, etc. The Indian State has poor capacity on thinking and executing industrial policy. As a general principle, in public policy thinking in India, it's best to eschew industrial policy or planning, and just focus on getting the basics right.

No industrial policy was required in getting to the ubiquitous water tanks on every roof in India -- it came from private choices responding to the failures of public policy on water. The invisible hand is amply at work. Indian car manufacturers exported 542,000 cars in 2014-15. Hence, these firms have ample incentive to figure out electric cars. Unreliable and expensive electricity is giving ample incentive to customers to find better solutions. Indian software services and IT product companies have ample incentive to tune into this space, and build the software end of this emerging global environment. New technological possibilities will be rapidly taken up.

India should fix the grid. There are major economies of scale in making centralised electricity generation work. But we should see that we are coming at this from the opposite direction. In the West, we start from 100% centralised energy and will perhaps head towards 66% centralised energy. We in India may first overshoot to 40% centralised energy and then go up to 66% centralised energy through gradual improvements in public policy on centralised electricity.

Compare and contrast this with how we see water tanks on roofs. These water tanks are the physical manifestation of the failure of public policy in the field of water. When sound water utilities come up, they will do centralised production of 24 hour water pressure, and the water tanks will go away.

On one hand, the failures of public policy on electricity in India are exactly like the failures of public policy in water in India. Once it becomes possible to opt out of public systems to a greater extent, with generation and storage under the control of a campus, people will take to this. This will overshoot, going beyond what's technically sound. In the long run, when the policy frameworks on electricity become better, the share of centralised energy will go up. But there is good sense in distributed energy and it's not just a coping strategy. Even deep in the future, when policy failures are absent, there's a big role for distributed energy while there is no role for distributed water storage.

For an analogy, the wireless revolution came first to Indian telecom. But now that this is established, we know that there laying fibre to the home is required in order to get good bandwidth. We will asymptotically endup converging on what's seen in the West, we'll just come at it from a different direction.

India has yet to reap the efficiencies of centralised generation, transmission and distribution. We need to end subsidies and combat theft. This is the slow process of improving policy frameworks in electricity. The main point of this article is that along the difficult journey to this destination, we'll first have an upsurge of Sintex water tanks on roofs.

Sound pricing rules are required. From an Indian public policy point of view, the key action point required is that moment to moment, supply and demand should clear, the spot price should fluctuate, buyers of electricity should be fully exposed to these fluctuating prices, and the spot price at all points of time should be made visible to each buyer through an API. This is not insuperably difficult. Even the present bad arrangement -- unpredictable grid outage where the price goes to $\infty$ -- is actually pushing private persons in the right direction.

The market failure: externalities. Knowledge spillovers benefit society at large, and self-interest favours under-investment in knowledge. In the face of this market failure (i.e. positive externalities), perhaps the government can fund a few research labs [example] so as to grow skills in this emerging landscape. See Rangan Banerjee's article at page 38 of the December 2014 issue of Energy Next which talks about renewables R&D and manufacturing in India. It would help if there was a large number of pilot projects which aim to build towards campus-scale adoption, so as to have a precise sense of how well things work, solve local problems, and diffuse knowledge.

The gap in knowledge in India on batteries is large. But it is feasible for India to get into manufacturing power units, solar cells, etc. We need to study the steps taken by Japan and China to build up their capabilities in this field.

The importance of the cost of capital. Renewables involve high capital cost and near-zero running cost. The use case is critically about the cost of capital. Successful inflation targeting, and capital account openness, will give lower rates of return for equity and debt, which is required for the adoption of these technologies.

There is no market failure in energy conservation. When customers are given high prices of electricity, they have ample incentive to adopt energy-efficient technologies. India is in good shape on pricing in some areas (electricity, petrol) though not in some others (kerosene, LPG). Once the price of energy is correct, the next price that shapes adoption of energy efficient technology is the cost of capital. The failures of monetary policy and finance in India are giving a high cost of capital. Once these are solved, there is no market failure in the adoption of demand side innovations. Low interest rates and low required rates of return on equity will shift the private sector calculation in favour of energy efficient technology.

Implications for the private sector

If this scenario unfolds as described in India, there will be a loss of momentum in centralised energy, and sharp growth in distributed production and storage of energy.

Perhaps we will get a surge in imports of Lithium Ion batteries and slow growth of lead-acid battery production in India.

Acknowledgements

Brijesh Vyas helped me in understanding the issues and in getting the calculations right. He recommends that we read Linden's Handbook of batteries. I also thank Sanjay Arte, Ashwini Chitnis, Ashwin Gambhir, Sanjeev Gupta, Gopal Jain, Rajeev Kapoor and Anand Pai for useful discussions. All errors are, of course, mine.

2 comments:

Dear Ajay, I learnt a lot from reading this piece, and it put Elon Musk's /Tesla's keynote re the battery banks in context. When he said "leapfrogging like mobile phones and landlines", I was nodding along, because I'd already understood it through your article. Thanks for writing this piece.

I'm keen to see what policy modifications / incentives we need here in India to similarly leapfrog. Exciting times ahead. SincerelySowmya Rao

Very well written! Saw Musk's keynote earlier but your blog was extremely helpful in putting it in the Indian context and in understanding the various factors that are at play here. Cheering for renewable energy, ably supported by efficient energy storage tech!

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